What is a Futures Contract? Definition
A futures contract is a legal agreement to buy or sell a particular asset at a predetermined price at a specified time in the future. The buyer agrees to purchase the asset, and the seller agrees to deliver it on the contract's expiration date. Futures contracts are standardized by exchanges (CBOE, CME, NYMEX, etc.) in terms of quality, quantity, delivery time, and location.
Futures are commonly used for commodities (oil, gold, wheat), financial instruments (stock indices, bonds, currencies), and cryptocurrencies. They serve two main purposes: price risk management (hedging) and speculation.
How Do Futures Contracts Work?
Unlike stocks, a futures contract has an expiration date and specifies an asset delivery date. Until that date, the exchange marks positions to market daily:
- If the asset price increases, money is debited from the seller's account and credited to the buyer's account.
- If the asset price decreases, money is debited from the buyer's account and credited to the seller's account.
This daily settlement process is called mark-to-market. If a participant's balance falls below the maintenance margin, the exchange issues a margin call, requiring additional funds. Failure to meet a margin call results in the position being closed automatically.
What Are the Futures Contract Trading Specifications?
- Trading Code
- The exchange code for the contract (e.g., ES for E-Mini S&P 500, CL for Crude Oil, GC for Gold).
- Contract Month Code & Year
- A letter and number indicating expiration month and year (e.g., "H26" = March 2026). Month codes: F=Jan, G=Feb, H=Mar, J=Apr, K=May, M=Jun, N=Jul, Q=Aug, U=Sep, V=Oct, X=Nov, Z=Dec.
- Contract Size
- The exact deliverable quantity of the asset (e.g., 1,000 barrels of oil, 100 troy oz of gold, 50× index value for ES).
- Tick Size (Minimum Price Fluctuation)
- The smallest possible price movement in the contract (e.g., 0.25 index points for ESH26). Every tick move changes your position value by the tick value.
- Tick Value
- The monetary value of one tick (minimum price move). For ESH26: 0.25 points = $12.50. This is exchange-defined and fixed per contract.
- Point Value
- The monetary value of a one-point (whole number) move: Point Value = Tick Value ÷ Tick Size. For ES: $12.50 ÷ 0.25 = $50 per point.
How to Profit? — A Futures Contract Example
Suppose you go long (buy) 2 contracts of E-Mini S&P 500 (ES) at 4,700.00 and close at 4,750.00:
- Price change: 4,750.00 − 4,700.00 = 50 points
- Ticks moved: 50 ÷ 0.25 = 200 ticks
- P&L per contract: 200 × $12.50 = $2,500
- Total P&L (2 contracts): 2 × $2,500 = $5,000 profit
If you go short (sell) at 4,700 and price rises to 4,750, you would incur a $5,000 loss per 2 contracts.
How to Use Our Futures Contracts Calculator for Drawdown Protection
The futures contracts calculator helps you evaluate your risk before entering a trade. To protect against drawdowns:
- Enter your entry price and set the exit price to your stop-loss level.
- Input the contract's tick size and tick value from your broker or exchange specifications.
- Set your number of contracts you plan to trade.
- Calculate — the result shows your maximum loss if price hits your stop-loss.
- Adjust contract quantity or stop-loss level until the potential loss fits your risk tolerance (typically 1–2% of account equity per trade).
Forward vs. Futures Contracts
| Feature | Forward Contract | Futures Contract |
|---|---|---|
| Trading venue | OTC (private) | Exchange (standardized) |
| Standardization | Customizable | Standardized |
| Counterparty risk | High | Low (exchange guarantees) |
| Settlement | At expiry | Daily mark-to-market |
| Liquidity | Low | High |
| Margin required | Negotiated | Exchange-defined |
Futures Contracts vs. Options
| Feature | Futures | Options |
|---|---|---|
| Obligation | Both parties obligated | Buyer has the right, not obligation |
| Premium | No premium paid | Buyer pays a premium |
| Max loss (buyer) | Unlimited | Limited to premium paid |
| Complexity | Moderate | Higher (Greeks, expiry, strike) |
| Use case | Hedging, speculation | Income, hedging, leverage |
Common Futures Contracts Specifications
| Contract | Code | Tick Size | Tick Value (USD) | Point Value (USD) |
|---|---|---|---|---|
| E-mini S&P 500 | ES | 0.25 | $12.50 | $50.00 |
| E-mini NASDAQ-100 | NQ | 0.25 | $5.00 | $20.00 |
| Crude Oil (WTI) | CL | 0.01 | $10.00 | $1,000.00 |
| Gold | GC | 0.10 | $10.00 | $100.00 |
| 10-Year T-Note | ZN | 1/64 | $15.625 | $1,000.00 |
| Euro FX | 6E | 0.00005 | $6.25 | $125,000.00 |
FAQs
- What is a margin call in futures trading?
- When your account balance falls below the maintenance margin due to adverse price movement, the exchange issues a margin call requiring you to deposit additional funds. Failure to do so results in automatic position closure.
- Can I lose more than I invest in futures?
- Yes. Unlike options where buyers have limited loss, futures traders face potentially unlimited losses if the market moves sharply against their position. Always use stop-loss orders.
- What is the difference between tick size and tick value?
- Tick size is the minimum price increment (e.g., 0.25 points). Tick value is the dollar amount that one tick move represents in your account (e.g., $12.50). Point value = tick value ÷ tick size.
- What does "long" and "short" mean in futures?
- Going long means you buy the contract expecting prices to rise. Going short means you sell the contract expecting prices to fall. Both positions require margin and face daily mark-to-market settlement.
- How are futures contracts priced in different currencies?
- Our calculator supports USD, RUB, EUR, GBP, and 26 other world currencies. The tick value and resulting P&L are expressed in your selected currency. Most global futures markets denominate contracts in USD, but some local exchanges use other currencies.